Saturday, March 06, 2010

Supply Chain Management (SCM)

After covering Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) in previous blog posts, let us now look at some of the basic concepts of Supply Chain Management (SCM).

What is a supply chain? In simple terms, if the business of a company involves creating a product from parts bought from suppliers and selling the product to customer, it can be said that a supply chain exists. Supply Chain Management (SCM) describes the management of flow of materials, information, and funds across entire supply chain, from suppliers to component manufacturers to product assemblers/integrators to distribution of finished products, and finally to the customer. SCM can also be extended to include after-sales service, product returns, and recycling. The complexity of supply chain will vary with the size of the business and the intricacies and number of products manufactured.

Supply Chain Management (SCM) is not necessarily a business function. It is considered as a new business model necessary for an organization’s success and calls for the involvement of every member of the organization. In today’s business scenario, there is a need to be more socially and environmentally responsible while doing business, which results in more risks that need to mitigated and managed. This, coupled with ever-increasing customer requirements and expectations, globalization, pressure on cost and lack of availability of resources has increased the difficulty level of doing business. It is under these circumstances that managers are expected to improve profitability, increase revenue growth, capture and protect larger market share. In order to succeed under these conditions, companies must recognize that the ultimate success of an organization depends on the ability to integrate the organization’s network of business relationships in a mutually beneficial manner. The efficient management of this network of business relationships is Supply Chain Management (SCM).

A supply chain consists of several elements or components, which are connected by the movement of products along it. The customer is at both the ends of the supply chain – the supply chain starts with the customer deciding to buy a product and the cycle is completed when the product is delivered to customer, accompanied by the invoice [An invoice is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer] for the product.
Let us now take a closer look at the different components of the supply chain.

Customer: As already discussed, the supply chain starts when a customer decides to buy a product offered by a company. Once the decision is made, the customer contacts the sales division of the company and places an order. The sales department creates a sales order, which specifies the type of the product(s), the required quantity, and the delivery date specified by the customer. If the product involved needs to be manufactured, the sales order will include a requirement that needs to be fulfilled by the production department.

Planning: Each sales order generated in response to customer request will trigger a requirement. Such requirements from all the sales orders will collated by the planning department. The planning department will then create a production plan to manufacture the products to fulfill the customers’ orders. Manufacturing the products often requires purchasing of raw materials.

Purchasing: The purchasing department is responsible for arranging the purchase of raw materials required for the manufacturing of products to fulfill customer orders. Based on the inputs from planning department, the purchasing department sends purchase orders to suppliers to deliver necessary raw materials on the required date as per production plans.

Inventory: The inventory division is responsible for tracking delivery of raw materials from suppliers, ensuring quality, and quantity of received materials and for moving the materials to warehouse. The storage of materials until the production department requires them is also the task of the inventory division. Suppliers also send invoice for the materials delivered to the company.

Production: The inventory division moves the raw materials from the warehouse to the production area, based on the production plan prepared by the planning department, as explained above. The production division manages the manufacture of products ordered by the customers, from the raw materials, which has been moved to the production area. After the manufacturing process is complete, the products undergo testing before being moved back to the warehouse, where the products will be stored until they are delivered to the customer.

Transportation: Once the finished and tested products arrive at the warehouse, the transportation (shipping) department identifies the most efficient way to ship the product so that it arrives on or before the date specified by the customer while ordering the product. The invoice for the finished goods is also delivered to the customer along with the goods.

This brings us to the end of this blog post on Supply Chain Management (SCM). Thank you for your interest. 

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